Let’s Be Clear: Entirely Foreign Donations To Political Parties From 1976 Onwards Are Not Exempt From Scrutiny

Snapshot

...however, that doesn’t yet mean that donations to political parties are as transparent as they should be.

An email group that I am a part of had an animated discussion about how the National Democratic Alliance (NDA) government in India had opened the floodgates for all and sundry foreign donors to political parties merely because the Bharatiya Janata Party (BJP) wanted to regularise a donation that it might have received from a foreign source. Not only that, the BJP also went back and amended the relevant section or clause all the way back to 1976.

Well, the truth is somewhat anti-climatic. It had only amended a clause that deemed Indian companies majority-owned by foreigners as a ‘foreign source’. Everything else about foreign-sourced donations remains unchanged.

Take these lines, for example, from an article that does not seem well-disposed towards the BJP government:

Tellingly, they recently collaborated to insert an unobtrusive clause in the latest annual budget that has the effect of absolving both from any prior violations of rules restricting foreign political donations.

‘A Mighty Wind’ by Max Rodenbeck, The New York Review of Books

These lines appear in the article that reviews two books on India. The lines are a perfect illustration of the sloppiness that has characterised the discussion on what the BJP-led NDA government had done with respect to political donations from ‘foreign sources’.

Look at the header in a story that appeared in Business Line:

That is both over the top and wrong or grossly misleading. But in reality, this is what had happened:

(1) A Delhi High Court Ruling in March 2014 found the two major political parties – the BJP and Congress – guilty of violating the provisions of the Foreign Contribution (regulation) Act (FCRA) when they accepted donations from Vedanta. The petition was moved by the Association for Democratic Reforms and they were represented by Prashant Bhushan, in this particular case.

(2) Then, in order to nullify the court ruling, the BJP government, along with the budget for 2016-17, had sought to retrospectively amend the applicability of FCRA for political donations from foreign sources up to 2010.

(3) The Business Linearticle with the header featured above gives the exact wording as per the Finance Bill:

Entry number 217 in Part XIX of the amendments in the 2018 finance Bill (Amendment to the Finance Act, 2016), which reads : “In the Finance Act, 2016, in section 236, in the opening paragraph, for the words, figures and letters ‘the 26th September, 2010, the words, figures and letters ‘the 5th August, 1976’ shall be substituted,” said the amendment.

However, it is interesing that when I saw the Finance Bill tabled in the Parliament along with the budget, this is the wording I found:

It is proposed to bring the said amendment with effect from the 5th August, 1976 the date of commencement of the Foreign Contribution (Regulation) Act, 1976, which was repealed and re-enacted as the Foreign Contribution (Regulation) Act, 2010. [Finance Bill, 2018 – p 99/102 – right column, penultimate paragraph]

Maybe Business Line saw the Finance Act text because once a bill is passed by the Parliament, it becomes an act.

(4) Prospectively too, the FCRA provision will not be applicable to foreign-sourced donations for political parties. That was ensured by the amendment to FCRA moved with the Finance Bill 2016:

Under the proposed amendment—part of the budget proposals presented on 29 February—a donation by a company which has majority foreign ownership will no longer be treated as “foreign source” as long as it conforms to the sectoral foreign investment cap and conditionality.

Clause 233 of the Bill seek to amend the Foreign Contribution (Regulation) Act, 2010 so as to insert a proviso in sub-clause (vi) of clause (j) of sub-section (1) of section 2 of the said Act providing therein that notwithstanding the nominal value of share capital of a company exceeding one-half per cent at the time of making contributions such company shall not be deemed to be a foreign source, if the foreign investment is within the limit specified under the Foreign Exchange Management Act, 1999 or the rules or regulations made thereunder.

(6) The ‘clarification’ made by the Finance Bill 2016 allows for funding made by Indian subsidiaries (of foreign companies) to be treated as ‘non-foreign sourced’ even if the majority ownership (above 50 per cent) is with the foreign parent company, as long as the investment is within sectoral caps for foreign investments for that sector.

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(7) If we go to the FCRA 2010 (2)(1)(j)(vi) – which is what was amended by the Finance Bill 2016 and again by the Finance Bill 2018 – it is clear that a company under the Companies Act 1956 was deemed a ‘foreign source’ if it was majority-held by a ‘foreigner’ with the term foreigner being defined elsewhere in the section. (See here.)

Now, this has been amended such that an Indian company incorporated under the Companies Act will not be deemed a ‘foreign source’ even if more than 50 per cent is held by a ‘foreigner’ as long as the investment by that company is within sectoral caps, and so on. This amendment has been made effective retrospectively from 1976.

(8) But this amendment does not facilitate Indian political parties collecting donations from totally foreign sources. The amendment is only with respect to Indian companies that were deemed as a ‘foreign source’ earlier. To be very clear, the amendment and its retrospective effect are specifically only with reference to Section 2(1)(j)(vi) – definition of a ‘foreign source’ with respect to a company – of the FCRA, 2010.

(9) The Government of India press release provided a clarification as well to reiterate this aspect, but it is clear that this was done specifically to regularise past donations by Indian subsidiaries of foreign companies with a majority held by foreigners and to facilitate such donations in the future too.

(10) Now, let us evaluate the decision by the government:

Together with bearer political donation bonds that was part of last year’s budget proposals (2017-18), donations to political parties have become a lot more opaque and now with donations by an Indian company which has majority foreign ownership will no longer be treated as a ‘foreign source’. The wellspring of corruption from ‘political funding’ has become incrementally more rejuvenated, with this retrospective and prospective amendment.

To be clear, the wellspring has always been existed. That is why the Congress party did not criticise the BJP for this amendment. At the margin, the BJP has rejuvenated and not depleted that wellspring. That is a disappointment for many.

(11) It is not a blow in favour of probity and integrity in political funding for sure. But it is not as ‘open-ended’ an invitation for foreign influence as many have alleged.

It is possible that this distinction was a bit blurred in people’s minds while discussing this matter.

However, making it easier for Indian companies majority-owned by foreigners does not necessarily advance the cause of sound public policy. Further, bearer political donation bonds being made through banking channels does not help either. In general, the idea behind making political funding transparent is for the public to know who is donating to whom so that public policy decisions can be understood and evaluated better.

In sum, the BJP has lost an opportunity here to burnish its reputation for anti-corruption and to stop foreign influence-peddling into Indian domestic affairs.

This piece was first published on the writer’s blog and has been republished here with permission.

V. Anantha Nageswaran is an independent financial markets consultant based in Singapore